Internet service providers vs content

April 03, 2014

The proposed transaction between Comcast Corp. and Time Warner Cable Inc. highlights the vast gap between the world the broadband industry’s critics imagine and the real world in which these companies compete.

Device, app and content companies are capturing most of the benefits created by Internet service providers. I recently studied two groups of companies – firms that provide the Internet, like AT&T and Verizon, and those that use it, like Facebook and Google. The Internet giants earn six to eight times the rate of return of ISP, which must continually improve its networks to keep pace with rapidly growing bandwidth demands while the device and content providers realize the bulk of the value.

While critics imagine a post-transaction Comcast dominating the market, the content and device providers, not the cable providers, hold the cards. Content costs drive cable price increases on consumers, because the connection is worthless without them.

Comcast has far faster Internet speeds and more consumer offerings than Time Warner, so its combination will simply amount to a “trade-up” for Time Warner customers. More important, the transaction will let it compete with Apple Inc., Netflix Inc., Google Inc. and the other true giants in the broadband space.

— Ev Ehrlich, former Clinton Administration under secretary of commerce